Monday, June 15, 2015

Russia cuts rate another 100 bps, inflation limits easing

Russia's central bank cut its key policy rate by 100 basis points to 11.50 percent, as expected by many economists, and said it was "ready to continue cutting the key rate as consumer price growth declines further in compliance with the forecast but the potential of monetary policy easing will be limited by inflation risks in the next few months."
The Bank of Russia has now cut its rate by 550 basis points this year as it continues to roll back last year's 1,150 points of rate hikes, including December's 650 point hike, to slow down the plunge in the ruble amid falling oil prices and accelerating inflation.
The central bank said today's rate cut took account of lower inflation and the "persistent risk" of a considerable cooling of the economy, and forecast that inflation would fall below 7 percent by June 2016 and reach its 4.0 percent target in 2017, helped by slack demand. In April the central bank forecast that inflation would fall below 8 percent by April next year.
Russia's inflation rate peaked in March at 16.9 percent and declined further to 15.8 percent in May and the again to 15.6 percent as of June 8, according to the Bank of Russia, driven by lower consumer demand amid falling incomes and the impact of an earlier fall in the ruble.
Russia's economy is continuing to contract, the central bank said, pointing to falling orders, an ongoing decline in production capacity, higher unemployment and falling wages, which will lead to lower retail lending and then consumer spending.
Capital investment will also contract further due to negative expectations to the outlook, tight lending conditions and the lack of access to foreign capital. This will also reduce imports, but "given the floating exchange rate, exports will decline less significantly," the central bank said, forecasting a 3.2 percent contraction in Russia's economy this year compared with its January forecast for a 3.2 percent contraction in the first half of this year.
Russia's Gross Domestic Product next year could expand by 0.7 percent, the bank said, if oil prices recover to $70 a barrel by late 2016. But if oil prices remain around $60 next year year, Russia's economy will contract by 1.2 percent.
In the first quarter of this year Russia's economy contracted by an annual rate of 1.9 percent.
The ruble fell 45 percent against the U.S. dollar in 2014 and continued to drop in January, hitting a low of almost 70 to the dollar on Feb. 1. Since then the ruble has strengthened, hitting 49.3 in mid-May before slipping back to trade around 55 to the dollar today, an appreciation 9 percent this year.

The Bank of Russia issued the following statement:

"On 15 June 2015, the Bank of Russia Board of Directors decided to reduce the key rate from 12.50 to 11.50 percent per annum, taking account of lower inflation risks and persistent risks of considerable economy cooling. Amid significant contraction in consumer demand and ruble appreciation in February-May 2015, consumer price growth continued to slow down. According to the Bank of Russia forecast, given these factors annual inflation will fall to less than 7% in June 2016 to reach the target of 4% in 2017. The Bank of Russia will be ready to continue cutting the key rate as consumer price growth declines further in compliance with the forecast but the potential of monetary policy easing will be limited by inflation risks in the next few months.

Having reached its peak in March annual inflation fell to 16.4% in April and 15.8% in May. According to Bank of Russia estimates, the annual rate of consumer price growth stood at 15.6% as of 8 June 2015. Weekly inflation stabilised at about 0.1% in May-early June. Consumer price growth decline was conditioned primarily by lower consumer demand amid contracting real income, and also ruble appreciation in February-May. Moreover, prices have adjusted to external trade restrictions imposed in August 2014 without exerting inflationary pressure.

Relatively tough monetary conditions are also conducive to inflation reduction. Money supply (M2) growth rate remains low. Lending and deposit rates are adjusted downwards under the influence of previous Bank of Russia decisions to reduce the key rate. However, they remain high, on the one hand, contributing to attractiveness of ruble savings, and, on the other hand, alongside with tighter borrower and collateral requirements, resulting in lower annual lending growth.

Major macroeconomic indicators demonstrate further economy cooling. Though structural factors continue hampering the economic growth, output contraction has currently signs of cyclical nature. It is attested, among other things, by the reduced number of new orders, the on-going decline in production capacity and labour force utilisation, and a certain rise in the unemployment rate. According to Bank of Russia estimates, the labour market adjusts to the new conditions mostly through wage decrease and growing part-time employment. These factors, alongside with a decrease in retail lending, will result in further decline in consumer spending. Fixed capital investments will continue to contract due to economic agents’ negative expectations with regard to the Russian economic outlook and tight lending conditions. Investment demand will also be contained by limited substitution of external sources of funding with domestic ones given shallow Russian financial market and high ruble debt burden. Implementation of government anti-recessionary measures will facilitate investments. Sluggish investor and consumer activity will result in low demand for imports. Given the floating exchange rate, exports will decline less significantly. As a result, net exports will be the only component to make a positive contribution to output growth. In 2015, GDP is expected to contract by 3.2%. Further economic situation will depend on the dynamics of energy prices and the economy’s ability to adapt to external shocks. According to Bank of Russia forecasts, in 2016, GDP growth will stand at 0.7%, if oil prices recover to US$70 per barrel by late 2016. However, in case oil prices remain at about US$60 per barrel during 2016, output will contract by 1.2%.

Slack domestic demand will facilitate inflation reduction in 2015-2017. The ruble appreciation in February-May will have additional restraining influence on prices in the next few months. A slowdown in consumer price growth will make room for inflation expectations decrease. According to the Bank of Russia forecast, annual inflation in June 2016 will slow down to less than 7% to reach the target of 4% in 2017.

Inflation risks emanate primarily from aggravation of external economic situation, enhanced inflation expectations, revision of increases in administered prices and tariffs planned for 2016-2017, and fiscal policy easing. The Bank of Russia will be ready to continue cutting the key rate as inflation risks abate and inflation declines further in compliance with the forecast but the potential of monetary policy easing will be limited by inflation risks in the next few months.

The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled for 31 July 2015. The press release on the Bank of Russia Board of Directors’ decision is to be published at 13:30, Moscow time."